Fed chief Janet Yellen on Monday called last week’s U.S. jobs numbers
disappointing and opted not to repeat her message that U.S. interest
rates could rise again in the coming months. That was balanced, however,
by her cautioning against attaching too much significance to the
payrolls data in isolation and as she pointed to other more upbeat
signals for the economy and indicated rate hikes this year would still
be appropriate.

On Friday, when the jobs report came in at a very weak
38,000 jobs added, the markets were down slightly. Clearly the news from
the jobs report had the effect of taking a June rate hike off the
table. In the past, the markets would have rallied on that kind of news,
but it made for terrible optics, and so we had to wait for Fed chair
Yellen to not say anything. And besides, the markets had already priced
in no rate hike in June. So, what’s going on here?

The S&P 500 has
gone 42 trading days without a decline of 1% or more. That’s the
longest stretch without a big drop since a 66-day period that ended in
July 2014, according to FactSet. The U.S. stock market hasn’t dropped by
1% or more since April 7. During one particularly scary stretch in
mid-February, the S&P 500 suffered three plunges of 1% or more on
separate occasions in just five days. This slow steady advance leaves
the market in extremely overbought territory.

Economic data remains weak; we just wrapped up another horrible
earnings season; valuations remain expensive; we are moving into a
seasonally weak time period; the yield curve is flattening; volume is
weak.

Meanwhile, the bullish case for this market is tenuous at best. It
might be bullish…, if the Fed keeps rates unchanged; if the economy
bounces back in the second half (we’ve already given up on a second
quarter bounce); if earnings improve (which is plausible given how low
the bar is now set); if oil trades higher (even though higher oil prices
will surely lead to higher supplies); if the dollar doesn’t firm up
again; if there is no Brexit; and if the markets continue to ignore the
data.

You get the idea. Still, it is possible to take out the old highs on
the S&P, even without a bullish case. If that happens I would still
be left wondering what is pushing the bullish case, other than a herd
mentality that is not sustainable. Today, stocks moved to an 11 month
high and then faltered on weak volume.

Productivity remains a key weakness of the economy and is especially evident during the low output of the first quarter. American workers were less productive
again in the first quarter. The Labor Department productivity declined
at an annual rate of 0.6 percent in the first quarter after a 1.7
percent drop in the fourth quarter.

The government first estimated that
productivity fell at a 1 percent rate. Not only did hours exceed output,
compensation rose at the same time, up 3.9 percent to lift unit labor
costs by 4.5 percent, even faster than the 4.1 percent gain first
reported. Though there seems to still be a belief that wage growth
remains sluggish, in reality, wages have finally begun to move higher in
earnest. The anecdotal and survey evidence has been pointing to rising
wages for a while, but the data were slow to fall into line. Now they
have.

CoreLogic’s Home Price Index
(HPI) shows that home prices in the USA are up 6.2 % year-over-year
(reported up 1.8 % month-over-month). Last month’s 6.7 % year-over-year
gain was revised downward to 5.5 %. CoreLogic HPI is used in the Federal
Reserve’s Flow of Funds to calculate the values of residential real
estate.

Consumer credit growth cooled off a bit in April from a torrid pace
in March, according to the latest government estimates. Credit growth
rose $13.4 billion in April, or at a seasonally adjusted annual rate of
4.5%, the Federal Reserve said Tuesday.
Economists had expected a gain of $18 billion in April consumer credit.
This is down from a revised $28.4 billion, or 9.6% pace in March. That
was the largest dollar gain in consumer credit on record. The Fed said
credit-card debt rose at a 2.1% rate in April, down from 13.3% in the
prior month, which was the largest gain February 2001.

Non-revolving
debt, mainly car and student loans, which has powered credit growth in
recent years, expanded at a 5.4% rate in April, below the 8.2% gain in
March. As a result of the gain in April, total outstanding consumer
credit reached an all-time peak of $3.6 trillion.

Even before Mario Draghi starts
his corporate-bond buying program tomorrow, he’s pushed down borrowing
costs in Europe toward unprecedented levels, with the average yield on
euro investment-grade company notes tumbling to 1%. On Tuesday, a series
of government bond yields tumbled to multi-month and all-time lows.

The
ECB in March announced it would expand its asset-purchasing program to
include corporate bonds in an effort to directly lower borrowing costs
for businesses and to help lift persistently low inflation. One concern
is that corporate buybacks might have some unintended consequences, such
as stock buybacks and widening spreads between bonds that are eligible
for ECB’s purchases and those that aren’t.

Second-round bids for Yahoo’s internet business were due yesterday.Verizon
Communications reportedly planned to submit a bid worth about $3
billion for Yahoo’s internet business, according to the Wall Street
Journal. The telecom giant reportedly isn’t interested in other Yahoo
assets such as patents and real estate. The private-equity firm TPG and a
team led by Quicken Loans founder Dan Gilbert are said to be among the
other interested parties. Yahoo is projected to hold at least one more
cycle of bidding, and the offers could change by the final round.

U.S. investigators are trying to
determine whether Goldman Sachs violated the Bank Secrecy Act when it
didn’t sound an alarm over a suspicious transaction involving Malaysia’s
state fund 1MDB. After raising $3 billion via a bond issue for the
troubled fund, Goldman sent the proceeds to a Swiss bank account
controlled by 1MDB, with half of the money disappearing offshore within
days and some reappearing in the prime minister’s bank account.

Royal Dutch Shell
will exit oil and gas operations in up to 10 countries in a drive to
cut costs as it weathers weak oil prices and has to pay down debt
following its $54 billion acquisition of BG Group. The company is active
in more than 70 countries and said it would like to focus on 13
important nations where it is making good returns, including Brazil,
Australia and the United States. The move, which includes the sale of 10
percent of its oil and gas production assets, will make Shell a smaller
company that offers investors access to a more gas-heavy portfolio than
some of its rivals.

Shares of Biogen
dropped this morning after an experimental drug for multiple sclerosis
failed in a mid-stage trial. The drug missed both the main and secondary
goals for treating the disorder. Biogen makes most of its money from
drugs treating MS and has been seeking new treatments to accelerate
growth.

Valeant Pharmaceuticals
announced a loss of $1.08 a share, which was adjusted to a gain of
$1.27 when factoring out one-time adjustments. Valeant cut its 2016
earnings and sales forecasts, marking a major reset point as the once
high-flying company tries to get back on its feet.

First-quarter
earnings — the last set of full results under former Chief Executive
Officer Michael Pearson — gave investors the first detailed picture of
the drug maker’s struggles to sell its products during the recent months
of chaos. Two of Valeant’s key categories, dermatology and prescription
ophthalmology, slumped by 43 percent and 30 percent, respectively. In
dermatology in particular, the company has faced push-back from health
insurers and pharmacy benefit managers after increasing its prices.

A U.S. District Judge has
found a pattern of misconduct by Merck including lying under oath and
other unethical practices, freeing Gilead Sciences from paying damages
for infringing on Merck’s patents with its hepatitis C treatments –
Sovaldi and Harvoni. The ruling comes after a federal jury on March 24
ordered Gilead to pay $200 million in damages, based on findings that
Merck’s patents were valid.

Samsung
is considering introducing two new smartphone models that will feature
bendable screens. One model is said to fold in half like a cosmetic
compact, while the other has a 5-inch display that “unfurls” into a
tablet-sized 8-inch panel. The devices using organic light-emitting
diodes could be unveiled as soon as early 2017.

Leading European countries
have decided not to extend the license for glyphosate, a herbicide used
in Monsanto’s top selling weed killer. The EU is worried about growing
public concerns it could cause cancer.

Daimler is laying off more
than 1,200 workers at three plants in the U.S. and one in Mexico, the
second such cut this year in response to falling demand for commercial
trucks. Last month, Daimler projected a 15% decline in North America
sales of medium and heavy-duty trucks, warning that a slump in the
market would significantly lower its earnings before interest and tax in
2016.

Ralph Lauren announced a restructuring plan. The
company also plans to cut 8% of its workforce in the current fiscal
year. As of April, it employed about 26,000 people around the world,
11,000 of whom are part-time workers. The planned job cuts will be in
addition to the 5% workforce reduction that the company already
implemented in its last fiscal year. The company plans to close about 50
stores. The company currently has 493 stores, including 216 in the U.S.

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